Sargent, Sims Win Economics Nobel

The economics Nobel was awarded this morning to Thomas J. Sargentof New York University and Christopher A. Simsof Princeton University for their work on how to assess the effects of policy changes on the economy.

The award, officially known as Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was accompanied by an explainer from the academy that you can read here. “Sargent’s awarded research concerns methods that utilize historical data to understand how systematic changes in economic policy affect the economy over time. Sims’s awarded research instead focuses on distinguishing between unexpected changes in variables, such as the price of oil or the interest rate, and expected changes, in order to trace their effects on important macroeconomic variables. The questions which the laureates have dealt with are obviously interrelated. Although Sargent and Sims have carried out their research independently, their contributions are complementary in many ways,” the academy said.

On his Marginal Revolution blog, economist Tyler Cowen notes in his profile of Sargent: “This is very much a ‘non Keynesian’ prize. I think of Sargent as a ‘foundationalist’ economist who always insists on a model and who takes the results of that model seriously. In general he would be placed in the ‘market-oriented’ camp, though it is a mistake to view his work through the lens of politics.”

“There will be lots of talk today about rational expectations. But Sims’ recent work has been about our limited ability to process info,” said economist Justin Wolfers following the announcement.

Cowen points to several important papers on expectations and their interaction with policy changes.

Meanwhile, an interview with Sargent from 2010 looks at his response to criticism of economics following the financial crisis and he talks about issues in Europe that are fueling current concerns. The same interviewer, former director of Research at the Minneapolis Fed Art Rolnick, spoke with co-laureate Sims in 2007 about the importance of the Fed, read that piece here.

A more detailed look at the work of the two laureates can be found here. Sargent and Sims “developed the methods that now predominate in empirical studies of the two-way relations between money or monetary policy and the broader macroeconomy. Sargent is the father of modern structural macroeconometrics… Sims is the father of vector autoregressions (VARs) as an empirical tool in macroeconomics. This has become an indispensable tool for applied researchers, alongside structural econometrics.”

In his profile of Sims, Cowen calls him “one of the most important figures in macro econometrics in the last thirty years, if not the most important.” Here is a presentation on his contributions on vector autoregression as a macroeconomic method and impulse functions.